Incoterms in Commodity Trade: What They Cover, and What They Leave Open
Most commodity contracts allocate millions of dollars of risk in three letters. FOB Rotterdam. CIF Mersin. DAP Jebel Ali. Traders use these terms daily, often without a precise sense of where their obligations stop and the counterparty's begin.
Incoterms — the trade terms published by the International Chamber of Commerce, currently in their 2020 edition — are genuinely useful. They compress a set of complex obligations into a shorthand both sides recognise. But they are narrower than most people assume, and the gaps are where disputes live.
What Incoterms actually decide
An Incoterm answers a small number of questions, and answers them well:
Where does risk pass from seller to buyer? This is the central function. Under FOB, risk passes when the goods are loaded on board the vessel at the named port. Under CIF, risk also passes on loading — even though the seller pays freight and insurance to the destination. Under DAP, risk stays with the seller until the goods are placed at the buyer's disposal at the named place.
Who pays for what? Carriage, loading, unloading, export and import formalities. The term allocates each cost line.
Who handles customs clearance? Export clearance is usually the seller's job; import clearance usually the buyer's. DDP is the exception where the seller takes on import clearance and duties — an obligation sellers frequently accept without appreciating what it means in an unfamiliar jurisdiction.
Who arranges carriage and insurance, if anyone? Only two terms — CIF and CIP — oblige the seller to insure. Under every other term, insurance is a commercial decision, not a contractual duty.
The eleven terms, grouped
Seven terms work for any mode of transport: EXW, FCA, CPT, CIP, DAP, DPU and DDP. Four are reserved for sea and inland waterway carriage: FAS, FOB, CFR and CIF.
That second group matters more than it looks. FOB, CFR and CIF are built around the concept of goods crossing the ship's rail — a model that fits bulk cargo poured into a hold, and fits containers badly. When a container is handed to a terminal days before loading, the seller has lost control long before the risk transfer point the term describes. The ICC's own guidance is that FCA, CPT or CIP should be used for containerised goods. In practice, FOB is still written into container contracts constantly, largely out of habit.
The gaps that cause disputes
Here is where the trouble starts. Incoterms are silent on several questions that traders assume they cover.
Title does not pass with risk. This surprises people. An Incoterm allocates the risk of loss or damage; it says nothing about when ownership transfers. Title passes according to the sales contract and the governing law. A seller can bear no risk and still own the goods; a buyer can bear all risk and own nothing. If your contract does not address title separately — particularly with a retention of title clause — you have left a significant question unanswered.
Payment terms are outside the scope. Incoterms do not tell you when payment falls due, what documents trigger it, or what happens on default. A letter of credit, an open account arrangement, cash against documents — these are separate contractual mechanics that must align with the Incoterm chosen, but are not determined by it.
Governing law and dispute resolution are not addressed. The term does not select a legal system or a forum. Those clauses do independent work, and they matter enormously when something goes wrong.
Breach and remedies are not covered. What counts as a failure to deliver, what damages follow, what the limitation period is — all governed by the contract and applicable law, not the Incoterm.
Sanctions and export controls sit on top of everything. No trade term relieves a party of compliance obligations. A seller who agrees DDP into a restricted jurisdiction has taken on an import clearance duty that may be impossible to perform lawfully.
Practical points for traders
A few observations from how these terms behave in real transactions.
Match the term to the cargo and the route. Bulk commodities loaded at berth suit the maritime terms. Containerised goods, multimodal movements and door-to-door deliveries suit FCA, CPT, CIP or the D-terms.
Name the place precisely. "FOB Turkey" is not a term; it is an invitation to argue. The named port or place should be specific enough that the exact point of delivery is not in question — and for FCA, whether delivery happens at the seller's premises or at a carrier's terminal changes the loading obligation entirely.
State the Incoterms edition. Write "Incoterms 2020" rather than leaving it open. The 2010 and 2020 editions differ in meaningful respects, including the insurance cover level required under CIP and the treatment of on-board bills of lading under FCA.
Do not assume the insurance is adequate. CIF requires only minimum cover under the Institute Cargo Clauses. For high-value commodity cargo that level is often insufficient, and the buyer bearing the risk may want to arrange its own supplementary cover or negotiate a higher standard into the contract.
Read the term against the payment mechanism. If a letter of credit calls for documents that the chosen Incoterm does not require the seller to produce, the transaction will stall at the bank counter. This is one of the most common practical failures in commodity trade documentation.
The underlying point
Incoterms are a drafting shortcut, not a contract. They handle risk transfer and cost allocation with precision and leave everything else — title, payment, governing law, forum, remedies, compliance — to the surrounding agreement. A well-drafted commodity contract uses the Incoterm for what it does well and addresses the rest explicitly.
The traders who get into difficulty are rarely the ones who chose the wrong term. They are the ones who assumed the term was doing more work than it was.
This article is provided for general information only and does not constitute legal advice. Trade terms operate within the context of a specific contract, governing law and commercial relationship. For advice on a particular transaction, please get in touch.